UFL Investments: Ch 20-23 Quizzes sam

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.20. If, at expiration, the price of a share of WFM stock is $103, your profit would be _____________.

$0 $103 - $100 = $3 - ($5 - $2) = 0 $0 × 100 = $0.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. What is the lowest stock price at which you can break even?

$103 x= $100 + $5 - $2 x= $103

In the Black-Scholes model, if an option is not likely to be exercised, both N(d1) and N(d2) will be close to ______. If the option is definitely likely to be exercised, N(d1) and N(d2) will be close to ______.

0 , 1

If the market futures price is 1.69 A$/$, how could you arbitrage?

0.5988(1.04) −0.5917(1.03) = 0.013301; when this relationship is positive; action a will result in arbitrage profits.

At expiration, the time value of an at-the-money put option is always __________. A. equal to zero B. equal to the stock price minus the exercise price C. negative D. positive

A. equal to zero

Which one of the following stock index futures has a multiplier of $10 times the index value? A. Russell 2000 B. Dow Jones Industrial Average C. Nikkei D. DAX-30 E. NASDAQ 100

B. Dow Jones Industrial Average

Portfolio A consists of 600 shares of stock and 300 calls on that stock. Portfolio B consists of 685 shares of stock. The call delta is 0.3. Which portfolio has a higher dollar exposure to a change in stock price? A. Portfolio B B. Portfolio A C. The two portfolios have the same exposure. D. Portfolio A if the stock price increases, and portfolio B if it decreases. E. Portfolio B if the stock price increases, and portfolio A if it decreases.

B. Portfolio A

Hedge ratios for long calls are always __________. A. between -1 and 0 B. between 0 and 1 C. 1 D. greater than 1

B. between 0 and 1

A swap __________. A. obligates two counterparties to exchange cash flows at one or more future dates B. allows participants to restructure their balance sheets C. allows a firm to convert outstanding fixed rate debt to floating rate debt D. obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets Correct! E. All of the options.

E. All of the options.

A put option has an intrinsic value of zero if the option is __________. A. at the money B. out of the money C. in the money D. at the money and in the money E. at the money and out of the money

E. at the money and out of the money

You are given the following information about a portfolio you are to manage. For the long-term you are bullish, but you think the market may fall over the next month. P Value -- $1M P Beta -- .60 Current S&P value -- 1400 Anticipated S&P Value -- 1200 If the anticipated market value materializes, what will be your expected loss on the portfolio? A. 14.29% B. 16.67% C. 15.43% D. 8.57% E. 6.42%

The change would represent a drop of (1,200 - 1,400)/1,400 = 14.3% in the index. Given the portfolio's beta, your portfolio would be expected to lose 0.6 × 14.3% = 8.57%.

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the option has delta of .5, what is its elasticity?

[(12.50 - 12)/12]/[(44 - 43)/43] = 1.79.

Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$ and convert the proceeds to U. S. dollars and invest them in the U. S at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures prices (maturity of 1 year). What would be your profit (loss)?

[A$167,000 / 1.67 × 1.04 × 1.66] −(A$167,000 × 1.03) = A$630.

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date you mustSelect one: a. buy one May oil futures contract. b. buy two April oil futures contract. c. sell one April oil futures contract. d. sell two April oil futures contract.

c. sell one April oil futures contract. The long position is considered the buyer; to close out the position one must take a reversing position, or sell the contract.

You took a short position in 2 S&P 500 futures contracts at a price of 1608.99and closed the position when the index futures was 1732.26. The contract size is $250 times the S&P 500 future price. You incurred:Select one: a. a loss of $57937. b. a loss of $59170. c. a loss of $60402. d. a loss of $61635. e. none of the above

d. a loss of $61635. You took the short position because you expect the price to fall, and would make a profit if the price did fall. Your profit would be $(1608.99-1732.26)*250*2 = $-61635.Negative value means a loss. Your loss would be $61635.The correct answer is: a loss of $61635

According to the Black-Scholes option-pricing model, two options on the same stock but with different exercise prices should always have the same _________________.

implied volatility

Strike prices of options are adjusted for ____________ but not for ____________.

stock splits, cash dividends

Consider a one-year maturity call option and a one-year put option on the same stock, both with striking price $100. If the risk-free rate is 5%, the stock price is $103, and the put sells for $7.50, what should be the price of the call?

$12.26 C = stock price - strike price/(1 + rf) + Put price C = 103 - 100/(1.05) + 7.50 C = $12.26

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2.The maximum potential profit of your strategy is ________ if both options are exercised.

$200 -$100 - $5 = -$105 $2 + $105 = $107 [107+(-105)] x 100 = $200

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the risk-free rate is 6%, what should be the value of a put option on the same stock with the same strike price and expiration date?

$3.00 P = 12 - 43 + 35/(1.06).5 P = $3.00

If the hedge ratio for a stock call is 0.30, the hedge ratio for a put with the same expiration date and exercise price as the call would be ________.

-.7 Call hedge ratio = N(d1) Put hedge ratio = N(d1) −1 0.3 − 1.0 = −0.7

A put option is currently selling for $6 with an exercise price of $50. If the hedge ratio for the put is −0.30 and the stock is currently selling for $46, what is the elasticity of the put?

-2.30! % stock price change = ($47 −$46)/$46 = 0.021739 % option price change = ($5.70 −$6.00)/$6 = −0.05 −0.05/0.021739 = −2.30.

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt. Give two numerical examples that show the possible outcomes, one favorable and one unfavorable.

A firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt by swapping the $6 million per year in interest income for an amount tied to a short-term interest rate (i.e. to make an interest rate swap). This would provide the firm protection against interest rate risk in that if interest rates rise, so will the firm's income. The firm would then enter into a swap agreement with a swap dealer to make this conversion. For example, a firm could offer to pay 6% on the notional principal of $1M and receive payment of the LIBOR rate on that amount of notional principal. So, the firm would swap $6M payment for a payment of "LIBOR x $1M", whereby the LIBOR rate was 6%. The firm would pay an interest income of $6M and receive a LIBOR payment of $6M. This would, in effect, convert the original fixed-rate bond into a synthetic floating-rate portfolio.

Describe the protective put. What are the advantages of such a strategy?

A protective put is a risk-management strategy that investors can use to protect themselves against adverse market change, specifically the loss of unrealized gains in an asset such as a stock. Protective puts provide a form of portfolio insurance against stock price declines in that they can limit losses, whereby the investor's portfolio is protected at levels below the strike price of the put. Additionally, premiums for this option are generally low.

An American call option can be exercised A. any time on or before the expiration date. B. only on the expiration date. C. any time in the indefinite future. D. only after dividends are paid. E. None of the options

A) any time on or before the expiration date A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time; whereas an American may be exercised at any time before the expiration date. That said, Asian options differ from both in that its payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time.

Use the two-state put option value in this problem. SO = $100; X = $120; the two possibilities for ST are $150 and $80. The range of P across the two states is __________ the hedge ratio is __________. A. $0 and $40; -4/7 B. $0 and $50; +4/7 C. $0 and $40; +4/7 D. $0 and $50; -4/7 E. $20 and $40; +1/2

A. $0 and $40; -4/7

You purchase one September 50 put contract for a put premium of $2. What is the maximum profit that you could gain from this strategy? A. $4,800 B. $200 C. $5,000 D. $5,200 E. None of the options.

A. $4,800 (50x100) - (2x100) = 4800

You write one JNJ February 70 put for a premium of $5. Ignoring transactions costs, what is the break-even price of this position? A. $65 B. $75 C. $5 D. $70

A. $65 BEPput = strike price - premium paid. It's a PUT because you're WRITING or SELLING the option.

A portfolio consists of 225 shares of stock and 300 calls on that stock. If the hedge ratio for the call is 0.4, what would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. -$345 B. +$500 C. -$580 D. -$520

A. -$345 = −$225 + [−$300(0.4)] = −$345

Which one of the following stock index futures has a multiplier of $100 times the index value? A. Russell 2000 B. FTSE 100 C. S&P Mid-Cap D. DAX-30 E. Russell 2000 and S&P Mid-Cap

A. Russell 2000

Which two indices had the highest correlation between them during the 2008-2012 period? A. S&P and DJIA; the correlation was 0.979 B. S&P and Russell 2000; the correlation was 0.948 C. DJIA and Russell 2000; the correlation was 0.908 D. S&P and NASDAQ 100; the correlation was 0.928 E. NASDAQ 100 and DJIA; the correlation was 0.876

A. S&P and DJIA; the correlation was 0.979

A protective put strategy is __________. A. a long put plus a long position in the underlying asset B. a long put plus a long call on the same underlying asset C. a long call plus a short put on the same underlying asset D. a long put plus a short call on the same underlying asset E. None of the options.

A. a long put plus a long position in the underlying asset Protective puts involve being long a stock and purchasing put options for that stock with a strike price that is near the underlying stock's current price.

The delta of an option is __________. A. the change in the dollar value of an option for a dollar change in the price of the underlying asset B. the change in the dollar value of the underlying asset for a dollar change in the call price C. the percentage change in the value of an option for a one percent change in the value of the underlying asset D. the percentage change in the value of the underlying asset for a one percent change in the value of the call

A. the change in the dollar value of an option for a dollar change in the price of the underlying asset

The percentage change in the stock call option price divided by the percentage change in the stock price is called __________. A. the elasticity of the option B. the delta of the option C. the theta of the option D. the gamma of the option

A. the elasticity of the option

A call option on a stock is said to be out of the money if A. the exercise price is higher than the stock price. B. the exercise price is less than the stock price. C. the exercise price is equal to the stock price. D. the price of the put is higher than the price of the call. E. the price of the call is higher than the price of the put.

A. the exercise price is higher than the stock price.

Currency options and currency futures options have different values because A. the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity B. the payoff on the currency option depends on the exchange rate futures price at maturity, while the currency futures option's payoff depends on the exchange rate at maturity C. currency options are American while currency futures options are European D. currency futures options are American while currency options are European E. currency options are quoted in U.S. dollars while currency futures options are quoted in the foreign currency

A. the payoff on the currency option depends on the exchange rate at maturity, while the currency futures option's payoff depends on the exchange rate futures price at maturity Because exchange rates and exchange rate futures prices generally are not equal, the payoffs may be quite different.

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that....

As an approximation, subtract the present value of the dividend from the stock price and recompute the Black-Scholes value with this adjusted stock price. Since the stock price is lower, the option value will be lower.

Suppose you purchase one WFM May 100 call contract at $5 and write one WFM May 105 call contract at $2. The maximum loss you could suffer from your strategy is __________. A. $200 B. $300 C. zero D. $500

B. $300 -$5 + $2 = -$3 × 100 = -$300 Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

The following price quotations on WFM were taken from the Wall Street Journal: Stock Price: 92 7/8, 92 7/8, 92 7/8 Strike Price: 85, 90, 95 February: 8 7/8, 4 1/8, 1 5/8 The premium on one WFM February 85 call contract is __________. A. $8.875 B. $887.50 C. $412.50 D. $158.00

B. $887.50 8 7/8 = $8.875 × 100 = $887.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

A portfolio consists of 800 shares of stock and 100 calls on that stock. If the hedge ratio for the call is 0.5. What would be the dollar change in the value of the portfolio in response to a $1 decline in the stock price? A. +$700 B. -$850 C. -$580 D. -$520

B. -$850 = -800 + (-100 x .5) = -850

What should be the proper futures price for a 1-year contract? A. 1.703 A$/$ B. 1.654 A$/$ C. 1.638 A$/$ D. 1.778 A$/$ E. 1.686 A$/$

B. 1.654 A$/$ 1.03/1.04(1.67 A$/$) = 1.654 A$/$.

Consider the following: rf US -- .04/year rf Australia -- .03/year Spot exchange rate -- 1.67y A$/$ What should be the proper futures price for a 1-year contract? A. 1.703 A$/$ B. 1.654 A$/$ C. 1.638 A$/$ D. 1.778 A$/$ E. 1.686 A$/$

B. 1.654 A$/$ $1.67(1.03/1.04) = $1.654/A$/$

Consider the following: rf US -- .04/year rf Australia -- .03/year Spot exchange rate -- 1.6y A$/$ If the futures market price is 1.63 A$/$, how could you arbitrage? A. Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. B. Borrow U.S. dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. C. Borrow U.S. dollars in the United States and invest them in the U.S. and enter futures positions to purchase Australian dollars at the current futures price. D. Borrow Australian dollars in Australia and invest them there, then convert back to U.S. dollars at the spot price. E. There is no arbitrage opportunity.

B. Borrow U.S. dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price.

Hedging one commodity by using a futures contract on another commodity is called __________. A. surrogate hedging B. cross hedging C. alternative hedging D. correlative hedging E. proxy hedging

B. cross hedging

Arbitrage proofs in futures market pricing relationships __________. A. rely on the CAPM B. demonstrate how investors can exploit misalignments C. incorporate transactions costs D. All of the options. E. None of the options.

B. demonstrate how investors can exploit misalignments

All else equal, call option values are higher __________. A. in the month of May B. for low dividend payout policies C. for high dividend payout policies D. in the month of May and for low dividend payout policies E. in the month of May and for high dividend payout policies

B. for low dividend payout policies Cash dividends affect option prices through their effect on the underlying stock price. Because the stock price is expected to drop by the amount of the dividend on the ex-dividend date, high cash dividends imply lower call premiums and higher put premiums. Conversely, low dividends imply higher call premiums and lower put premiums.

The price of a stock put option is __________ correlated with the stock price and __________ correlated with the striking price. A. positively; positively B. negatively; positively C. negatively; negatively D. positively; negatively E. not; not

B. negatively; positively

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. If the company unexpectedly announces it will pay its first-ever dividend three months from today, you would expect that A. the call price would increase B. the call price would decrease C. the call price would not change D. the put price would decrease E. the put price would not change

B. the call price would decrease

Dynamic hedging is __________. A. the volatility level for the stock that the option price implies B. the continued updating of the hedge ratio as time passes C. the percentage change in the stock call option price divided by the percentage change in the stock price D. the sensitivity of the delta to the stock price

B. the continued updating of the hedge ratio as time passes Dynamic hedgers will convert equity into cash in market declines to adjust for changes in option deltas.

A call option on a stock is said to be in the money if __________. A. the exercise price is higher than the stock price B. the exercise price is less than the stock price C. the exercise price is equal to the stock price D. the price of the put is higher than the price of the call E. the price of the call is higher than the price of the put

B. the exercise price is less than the stock price In the money (ITM) means that a call option's strike price is below the market price of the underlying asset, or that the strike price of a put option is above the market price of the underlying asset.

The potential loss for a writer of a naked call option on a stock is A. limited B. unlimited C. larger the lower the stock price D. equal to the call premium E. None of the options

B. unlimited If the buyer of the option elects to exercise the option and buy the stock at the exercise price, the seller of the option must go into the open market and buy the stock (in order to sell the stock to the buyer of the contract) at the current market price. Theoretically, the market price of a stock is unlimited; thus the writer's potential loss is unlimited.

You purchased one S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred: A) a loss of $1,500 B) a gain of $1,500 C) a loss of $750 D) a gain of $750 E) None of the above

C) a loss of $750 (-$950 + $947) X 250 = - $750

The premium on one WFM February 90 call contract is Stock Price: 92 7/8, 92 7/8, 92 7/8 Strike Price: 85, 90, 95 February: 8 7/8, 4 1/8, 1 5/8 A. $4.1250 B. $418.00 C. $412.50 D. $158.00

C. $412.50 4 1/8 = $4.125 × 100 = $412.50. Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

An American-style call option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call premium is $14. What is the time value of the call? A. $8 B. $12 C. $6 D. $4 E. Cannot be determined without more information

C. $6 TM = 14 - (50-42) TM = 14 - 8 TM = 6

You buy one Home Depot June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. Your maximum loss from this position could be __________. A. $500 B. $300 C. $800 D. $200 E. None of the options.

C. $800 (5+3) x 100 = 800 Price quotations are per share; however, option contracts are standardized for 100 shares of the underlying stock; thus, the quoted premiums must be multiplied by 100.

A longer time to maturity will unambiguously increase the value of a call option because: I. The longer maturity time reduces the effect of a dividend on call price. II. With a longer time to maturity the present value of the exercise price falls. III. With a longer time to maturity the range of possible stock prices at expiration increases. A. I only B. I and II C. II and III D. III and I E. All of the above

C. II and III

If you know that a call option will be profitably exercised then the Black-Scholes model price will simplify to _______. A. S0 - X B. X - S0 C. S0 - PV(X) D. PV(X) - S0

C. S0 - PV(X)

You purchased one AT&T March 50 call and sold one AT&T March 55 call. Your strategy is known as __________. A. a long straddle B. a horizontal spread C. a money spread D. a short straddle E. None of the options.

C. a money spread A "money spread" involves the purchase of one option and the simultaneous sale of another with a different exercise price. Whereas a "time spread" refers to the sale and purchase of options with differing expiration date.

Buyers of call options __________ required to post margin deposits and sellers of put options __________ required to post margin deposits. A. are; are not B. are; are C. are not; are D. are not; are not E. are always; are sometimes

C. are not; are

Suppose the price of a share of Google stock is $500. An April call option on Google stock has a premium of $5 and an exercise price of $500. Ignoring commissions, the holder of the call option will earn a profit if the price of the share A. increases to $504. B. decreases to $490. C. increases to $506. D. decreases to $496. E. None of the options

C. increases to $506 $500 + $5 = $505 (breakeven). The price of the stock must increase to above $505 for the option holder to earn a profit

If the stock price decreases, the price of a put option on that stock __________ and that of a call option __________. A. decreases; increases B. decreases; decreases C. increases; decreases D. increases; increases E. does not change; does not change

C. increases; decreases

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call __________. A. is out of the money B. is in the money C. is at the money D. None of the options.

C. is at the money Options are at the money when the exercise price and asset price are equal.

The current market price of a share of IBM stock is $195. If a call option on this stock has a strike price of $195, the call __________. A. is out of the money B. is in the money C. is at the money D. None of the options.

C. is at the money Options are at the money when the exercise price and asset price are equal.

The elasticity of a stock put option is always __________. A. positive B. smaller than one C. negative D. infinite

C. negative

Prior to expiration __________. A. the intrinsic value of a put option is greater than its actual value B. the intrinsic value of a put option is always positive C. the actual value of a put option is greater than the intrinsic value D. the intrinsic value of a put option is always greater than its time value

C. the actual value of a put option is greater than the intrinsic value

The maximum loss a buyer of a stock call option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the call premium. D. the stock price. E. None of the options

C. the call premium.

The maximum loss a buyer of a stock put option can suffer is equal to A. the striking price minus the stock price. B. the stock price minus the value of the call. C. the put premium. D. the stock price. E. None of the options

C. the put premium.

In the equation Profits = a + b Ã- ($/₤ exchange rate), b is a measure of __________. A. the firm's beta when measured in terms of the foreign currency B. the ratio of the firm's beta in terms of dollars to the firm's beta in terms of pounds C. the sensitivity of profits to the exchange rate D. the sensitivity of the exchange rate to profits E. the frequency with which the exchange rate changes

C. the sensitivity of profits to the exchange rate

Asian options differ from American and European options in that __________. A. they are only sold in Asian financial markets B. they never expire C. their payoff is based on the average price of the underlying asset D. they are only sold in Asian financial markets and they never expire E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset

C. their payoff is based on the average price of the underlying asset A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time; whereas an American may be exercised at any time before the expiration date. That said, Asian options differ from both in that its payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time.

The _________ is the difference between the actual call price and the intrinsic value. A. stated value B. strike value C. time value D. binomial value

C. time value

The intrinsic value of an out-of-the-money put option is equal to __________. A. the stock price minus the exercise price B. the put premium C. zero D. the exercise price minus the stock price

C. zero

Suppose that the risk-free rates in the United States and in the Canada are 3% and 5%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. A. $1.00/ C$ B. $1.70/ C$ C. $0.88/ C$ D. $0.78/ C$ E. $1.22/ C$

D. $0.78/ C$ $.80(1.03/1.05) = $0.78/C$

Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs. A. $1.60/BP B. $1.70/BP C. $1.66/BP D. $1.63/BP E. $1.57/BP

D. $1.63/BP $1.60(1.06/1.04) = $1.57/BP

An American-style call option with six months to maturity has a strike price of $35. The underlying stock now sells for $43. The call premium is $12. What is the time value of the call? A. $8 B. $12 C. $0 D. $4 E. Cannot be determined without more information

D. $4 12 - (43 - 35) = $4.

Commodity futures pricing __________. A. must be related to spot prices B. includes cost of carry C. converges to spot prices at maturity D. All of the options. E. None of the options.

D. All of the options.

Which of the following is(are) example(s) of interest rate futures contracts? A. Corporate bonds B. Treasury bonds C. Eurodollars D. Treasury bonds and Eurodollars E. Corporate bonds and Treasury bonds

D. Treasury bonds and Eurodollars

If you sold S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred __________. A. a loss of $1,500 B. a gain of $1,500 C. a loss of $750 D. a gain of $750 E. None of the options.

D. a gain of $750 ($950 - $947) X 250 = $750

A hedge ratio for a put is always __________. A. equal to one B. greater than one C. between zero and one D. between minus one and zero E. of no restricted value

D. between minus one and zero

Buyers of put options anticipate the value of the underlying asset will __________ and sellers of call options anticipate the value of the underlying asset will __________. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease E. Cannot tell without further information.

D. decrease; decrease

The value of a call option increases with all of the following except ___________. A. stock price B. time to maturity C. volatility D. dividend yield

D. dividend yield

If covered interest arbitrage opportunities do not exist, __________. A. interest rate parity does not hold B. interest rate parity holds C. arbitragers will be able to make risk-free profits D. interest rate parity does not hold and arbitragers will be able to make risk-free profits E. interest rate parity holds and arbitragers will be able to make risk-free profits

D. interest rate parity does not hold and arbitragers will be able to make risk-free profits

The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call __________. A. is out of the money B. is in the money C. sells for a higher price than if the market price of Boeing stock is $70 D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70 E. is in the money and sells for a higher price than if the market price of Boeing stock is $70

D. is out of the money and sells for a higher price than if the market price of Boeing stock is $70 A call is out of the money when the asset price is less than the exercise price.

The lower bound on the market price of a convertible bond is __________. A. its straight bond value B. its crooked bond value C. its conversion value D. its straight bond value and its conversion value E. None of the options.

D. its straight bond value and its conversion value A convertible bond is a straight bond plus an embedded call option. The market price of a convertible bond is made up of the straight bond value and the conversion value, which is the market value of the underlying equity into which a convertible security may be exchanged.

Before expiration, the time value of an at-the-money put option is always __________. A. equal to zero B. equal to the stock price minus the exercise price C. negative D. positive E. None of the options.

D. positive

Empirical tests of the Black-Scholes option pricing model __________. A. show that the model generates values fairly close to the prices at which options trade B. show that the model tends to overvalue deep in-the-money calls and undervalue deep out of the money calls C. indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks E. All of the above

D. show that the model generates values fairly close to the prices at which options trade and indicate that the mispricing that does occur is due to the possible early exercise of American options on dividend-paying stocks

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the __________. A. strike price B. exercise price C. execution price D. strike price or exercise price E. strike price or execution price

D. strike price or exercise price

Derivative securities are also called contingent claims because A. their owners may choose whether or not to exercise them B. a large contingent of investors holds them C. the writers may choose whether or not to exercise them D. their payoffs depend on the prices of other assets E. contingency management is used in adding them to portfolios

D. their payoffs depend on the prices of other assets Derivatives are securities whose prices are determined by, or derive from, the prices of other securities. Options and futures contracts are both derivative securities. The values of derivatives depend on the values of the underlying stock, commodity, index, etc.

If the hedge ratio for a stock call is 0.60, the hedge ratio for a put with the same expiration date and exercise price as the call would be _______. A. 0.60 B. 0.40 C. -0.60 D.-0.40 E. -.17

D.-0.40 Call hedge ratio = N(d1) Put hedge ratio = N(d1) −1 0.6 −1.0 = −0.4

The time value of a put option is __________. I) the difference between the option's price and the value it would have if it were expiring immediately II) the same as the present value of the option's expected future cash flows III) the difference between the option's price and its expected future value IV) different from the usual time value of money concept A. I B. I and II C. II and III D. II E. I and IV

E. I and IV

Which two indices had the lowest correlation between them during the 2008-2012 period? A. S&P and DJIA; the correlation was 0.979 B. S&P and NASDAQ 100; the correlation was 0.928 C. DJIA and Russell 2000 the correlation was 0.908 D. S&P and Russell 2000; the correlation was 0.948 E. NASDAQ 100 and DJIA; the correlation was 0.876

E. NASDAQ 100 and DJIA; the correlation was 0.876

An American call option allows the buyer to A. sell the underlying asset at the exercise price on or before the expiration date. B. buy the underlying asset at the exercise price on or before the expiration date. C. sell the option in the open market prior to expiration. D. sell the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration. E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

E. buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put __________. A. is out of the money B. is in the money C. can be exercised profitably D. is out of the money and can be exercised profitably E. is in the money and can be exercised profitably

E. is in the money and can be exercised profitably In the money (ITM) means that a call option's strike price is below the market price of the underlying asset, or that the strike price of a put option is above the market price of the underlying asset.

The price that the writer of a call option receives to sell the option is called the __________. A. strike price B. exercise price C. execution price D. acquisition price E. premium

E. premium The purchase price of the option is called the premium. It represents the compensation the purchaser of the call must pay for the right to exercise the option only when exercise is desirable.

The value of a stock put option is positively related to __________. A. the time to expiration B. the striking price C. the stock price D All of the options. E. the time to expiration and the striking price

E. the time to expiration and the striking price

If the futures market price is 1.63 A$/$, how could you arbitrage?

E0(1 + rUS) −FO(1 + rA); use the U. S. $values for the currency: 0.5988(1.04) −0.6135(1.03) = −0.009153; when relationship is negative, action b will result in arbitrage profits.

You took a short position in three S&P 500 futures contracts at a price of 900and closed the position when the index futures was 885, you incurred:Select one: a. A gain of $11,250. b. A loss of $11,250. c. A loss of $8,000. d. A gain of $8,000. e. None of the above.

a. A gain of $11,250. ($900 - $885) = $15 X 250 X 3 = $11,250

Which of the following items is not specified in a futures contract? I) the contract size II) the maximum acceptable price range during the life of the contract III) the acceptable grade of the commodity on which the contract is held IV) the market price at expiration V) the settlement priceSelect one: a. II and IV .b. I, III, and V c. I and V d. I, IV, and V e. I, II, III, IV, and V

a. II and IV The maximum price range and the market price atexpiration will be determined by the market rather than specified in thecontract

Which of the following items is specified in a futures contract? I) the contract size II) the maximum acceptable price range during the life of the contract III) the acceptable grade of the commodity on which the contract is held IV) the market price at expiration V) the settlement priceSelect one: a. I, II, and IV b. I, III, and V c. I and V d. I, IV, and V e. I, II, III, IV, and V

b. I, III, and V The maximum price range and the market price at expiration will be determined by the market rather than specified in the contract.